China’s High-Income Hopes

The final idea at risk of blocking further progress is that political transformation would undermine social order. One of the East Asian economies’ major lessons for developing countries is that economic development leads to institutional transformation, not the other way around.

In Taiwan and South Korea, for example, authoritarian governments after World War II compensated for the weakness of the rule of law by creating transitional institutional arrangements to facilitate GDP growth. In this sense, China has a significant advantage. Countries with weak government capacity have rarely managed to achieve high-income status.

But, as the description of these arrangements as transitional suggests, they cannot last indefinitely. After 35 years of dependence on such arrangements, China must embrace the rule of law and establish a reliable, independent judicial system capable of facilitating the liberalization of the services sector, protecting intellectual-property rights, and underpinning a competitive market-based system.

In short, the biggest risk to China’s continued development is not a crisis, but the failure of its political leaders and intellectual elites to recognize the need to transform a growth strategy that has proved successful so far. In fact, to the extent that a crisis could do more good than harm, warnings that the rapid credit expansion of recent years could trigger a debt crisis, or that the real-estate sector is on the verge of collapse, may not be as worrying as many believe.

Ideally, no such crisis would be needed. In this scenario, China’s economic slowdown since 2008, which could be viewed as China’s first modern growth crisis, would be sufficient to force China’s leaders to shift their focus from supporting double-digit annual GDP increases to restructuring the economy.

In fact, a consensus already appears to be emerging concerning the need to reduce China’s dependence on exports, expand trade in services, attract more foreign investment to its services sector, and accelerate the liberalization of exchange rates, interest rates, and cross-border capital flows – exemplified in the establishment of the last year. And, following the Third Plenum of the Chinese Communist Party’s 18th Central Committee last November, China’s leaders declared their commitment to allowing the market to play a greater role in shaping economic outcomes.

These are undoubtedly steps in the right direction. The question is whether China’s leaders will follow through on their declarations before it is too late.

Zhang Jun is Professor of Economics and Director of the China Center for Economic Studies at Fudan University, Shanghai.

Copyright: Project Syndicate, 2014.